Retail sales data for August, released on Friday, were disappointing, sending the balance spiraling to a new 37-year low.
In one place; of sterling the market was at $1.1348, a level not seen since April 1985.
The pound fell nearly 16% against the US dollar last year.
Between these against the euro, the pound fell to as much as €1.1405, a depth not plumbed since February last year.
This weakness of sterling comes despite the fact that the Bank of England has been interest rates more aggressively than some other central banks around the world, although not crucially, the US Federal Reserve.
But the irony of the timing of the latest decline is weighing on sterling’s long-term watchdogs – because today, Friday, marks the 30th anniversary of one of the most traumatic days in the pound’s post-war history.
Wednesday, September 16, 1992 is better known as “Black Mercury” and no one who worked in the markets at the time will forget it.
It saw the Bank of England burn through nearly 10bn worth of reserves, huge at the time, as interest rates were raised twice in the course of a day – all in a futile attempt to prop up the value of the pound.
But the result is greater than that. Black Wednesday was the day the Conservative government incinerated its carefully built reputation for economic competence.
In this sense, the moment opened the way for the first Labor government to be elected – for the first time in 18 years – in 1997.
The site for the Black Mercury works goes into detail.
At the time, the balance of the European trade mechanism (ERM) – the system that connected the currencies of various European countries before the creation of the euro. Under the ERM, currencies such as the French franc, the Italian lira, the German deutschemark or the pound were supposed to trade with each other in a narrow environment, described as “currency convergence”.
On balance, it was supposed to move no more than 6% against the German.
When the ERM sterling had settled at DM2.95, that meant more than DM3.127 or less than DM2.773. The main support by which sterling was supposed to trade at such a tight rate against the mark was mainly that the UK interest rate (which in those days was set by the government and not the Bank of England) was set close to the level set by the Bundesbank of Germany. .
If the mna looked to be moving outside that range, the Bank of England was supposed to intervene, threatening to buy or sell until the exchange rate returned within the limits set by the ERM.
Most people thought that the ERM balance had entered at too high a valuation against the German mark, and that it had created a huge opportunity for financial speculators such as George Soros.
They found it completely strange for the UK and Germany to have interest rates at similar levels: the UK needed lower interest rates emerging from the recession and the collapse of house prices, while Germany needed higher interest rates to see off the threat. higher inflation caused by the heavy spending that followed reunification between East and West Germany.
Speculators already had their tails up: there were other forces in the ERM, following a referendum in Denmark earlier that year, in which the Danes rejected the Maastricht treaty – a treaty that was supposed to pave the way for closer European integration, and the creation of the euro.
France, too, had declared a referendum on the treaty, and some other remedies, notably the lyre, for the limits by which they were supposed to be circumscribed, were negotiated.
Those methods came when earlier in the month, the British chancellor, Norman Lamont, had a very public argument with Helmut Schlesinger, the president of the powerful Bundesbank. The situation worsened when, on September 15, Mr. Schlesinger made some unguarded comments in the newspapers, which were interpreted in some places as if he wanted to value the pound – as indeed the lira had been forced days before.
Mr Schlesinger has stated that this was not his intention, and in 2017 he wrote: “I regret that my general remarks today, not specifically put in the balance, are a function of aggravating instead of sterling.”
but the damage was done. Speculators such as Mr Soros – who is estimated to have made more than £1bn worth of profits from the event – had already sold sterling in anticipation of the devaluation and, by the time Wall Street closed that night, the pound had fallen below its ERM. the floor
The following day, the balance was hit by a wave of selling, with Mr Lamont suggesting at 11am to raise interest rates from 10% to 12%, and then, three hours later, from 12% to 15%.
Heavy spending by the Bank, using what at the time were considered to be foreign currency reserves in the UK, hit the high tide.
Mr Lamont announced that night that sterling’s membership of the ERM would be suspended and that the second interest rate rise, to 15%, would not go ahead.
It was a humiliation for the Conservative government of John Major that the devaluation of sterling in 1967 had been for the Labor government of Harold Wilson. He was defeated by Tony Blair in the subsequent general election.
Sterling’s suspension from the ERM has kept the UK from ever entering the single currency – while its devaluation has paved the way for a firm recovery, which has kept the labor force from inheriting a strong economy since it came to power. Some economists now refer to it as “Golden Mercury”.
But Black Wednesday didn’t just pave the way to Labor’s election victory five years later. Many are now seeing this, even for a moment when conservative EU caution is breathing full blast into Euroscepticism.
As Mr Schlesinger himself wrote in 2017: “This is the beginning of a slow separation from the EU that culminated in last year’s Brexit vote.”
In Europe, meanwhile, there is also an answer. Sterling’s ignominious departure from the ERM contracts sentiments.
After the public days of the Gauls, the Treaty of the Meuse was decided in favor.
And European governments to think about integration concluded that it was vulnerable as long as it depended on the ERM – especially since the results of the Bundesbank’s reluctance to act in favor of currency bonds developed.
He moved to the creation of the euro.